Microsoft partners with B&N’s Nook in e-book business

(This story is running in the print edition of The Seattle Times May 1, 2012. – Janet I. Tu)

The new partnership between Microsoft and Barnes & Noble, announced Monday, gives both companies added ammunition in their battles against Amazon.com and Apple in the e-reading and college-textbook businesses.

But more than that, the new, as-yet-unnamed Barnes & Noble subsidiary is significant in the far broader competition among large tech companies over where consumers will buy, consume, create and store all their digital content.

“This is yet another tactical manifestation of the battle for control of everything you do digitally,” said John Jackson, an analyst with CCS Insight.

That battle is about “control of digital content: How you buy it, where you use it, where you store it, how you manipulate it, and how and where you share it,” he said.

Under the partnership, Microsoft will invest $300 million in the subsidiary, giving the software giant a 17.6 percent equity stake in an area where it had been lacking presence: e-books. The subsidiary is valued at $1.7 billion. Barnes & Noble will own 82.4 percent.

In addition to the initial $300 million, Microsoft has committed $180 million over three years in revenue-sharing guarantees. It also will contribute $125 million over five years to help the subsidiary expand into international markets.

As part of the deal, Barnes & Noble will create a Nook application for Windows 8. Nook is the bookseller’s e-reading device, coming in e-reader and tablet form.

Windows 8 is Microsoft’s radical retooling of its flagship operating system that’s being designed to be touch-tablet friendly. It’s likely to launch this fall.

For Barnes & Noble, the partnership means capital to enable it to compete more effectively with market-leading Amazon and its Kindle e-reader and Kindle Fire tablet.

For Microsoft, the partnership provides a broader platform to promote Windows 8 while also giving the company a presence in e-books and college textbooks. It allows Microsoft to have a hand in spurring e-reading across a range of Windows devices.

And it gives Microsoft a ready-made content-distribution system — something that’s become vital as companies such as Apple, Amazon, Google and Microsoft battle each other in the digital media market.

Think of it like this: You can download a movie and start watching it from your tablet or smartphone during your commute home, then finish it via an Internet-enabled console on your home TV.

If you want to buy the book on which the movie was based, you can go to your tablet to buy it. That book might inspire you to write your own book, which you can do on your PC or tablet-with-keyboard, before self-publishing it.

These companies would like you to do all of that on their devices, software and content-distribution services.

While Microsoft has been successful in generating content for its Xbox gaming console, its ventures into music distribution, with Zune, have been less successful. And it has virtually no presence in e-book titles.

That’s why it benefits Microsoft to have a partner such as Barnes & Noble, which already has a large amount of content and a content infrastructure, including working relationships with book and magazine publishers, a large presence in the education market, and a self-publishing division, said Allen Weiner, an analyst with research firm Gartner.

In addition, Barnes & Noble operates hundreds of bookstores on college campuses in addition to regular brick-and-mortar stores, Weiner said, “giving them a retail presence that actually has some meaning.”

Exploding market

Microsoft and Barnes & Noble clearly are banking on an explosion in e-reading in the next several years.

In a conference call with analysts Monday, Andy Lees, a Microsoft president, said e-book sales are forecast over the next few years to grow from less than 5 percent to more than one-third of books sold.

The partnership will enable Microsoft and Barnes & Noble to look at the future of how people are going to read, interact with stories, learn using these types of materials, and create works, he said.

Michael Cherry, an analyst with Directions on Microsoft, said he believes Microsoft and Barnes & Noble will jointly develop some form of authoring tool, making it easy for people to publish.

“Fundamentally,” he said, “you’re looking for readers to consume content but also for ways to facilitate getting the content to market.”

Windows 8

Neither Barnes & Noble CEO William Lynch nor Lees would definitely say whether Windows 8 would power Nook tablets in the future. But Lynch did note the Nook runs on a Texas Instruments platform with an ARM-design processor. Microsoft is building a version of Windows 8 that can run on ARM.

Current Nook e-readers and tablets use Google’s Android software. Last year, Microsoft filed a lawsuit, claiming Barnes & Noble infringed on some of its patents with its Android-run Nooks.

Barnes & Noble and the new subsidiary will pay Microsoft royalties for use of its patents.

Amazon effect

While the partnership would appear to compete most directly with Amazon, some e-commerce analysts downplayed the threat to the world’s largest Internet retailer, noting the Seattle company has a clear lead in the e-books business and is spending heavily to maintain that position.

An Amazon spokeswoman did not return an email seeking comment Monday.

Amazon is believed to control between 55 and 60 percent of the U.S. market for digital books, compared with a 30 percent share for Barnes & Noble.

Analysts also note Amazon has been making more movies and TV shows available for streaming on its website as part of an aggressive push to capture a bigger share of consumer spending on personal entertainment.

Amazon, which launched the Kindle Fire tablet in November, is expected to release a second model with a bigger screen in the second half of this year. That would bring it more in line with Apple’s bigger-screened iPad, the top-selling device in the broader U.S. tablet market.

(Seattle Times staff reporter Amy Martinez contributed to this report.)

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Welcome to Microsoft Pri0: That's Microspeak for top priority, and that's the news and observations you'll find here from Seattle Times technology reporter Matt Day. Send tips or comments to mday@seattletimes.com.